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Slow going for networking sector

Corporate customers are still tight-fisted with their budgets as they put off needed upgrades, analysts say.

The long-awaited spending flush that has been expected to benefit networking companies like Cisco Systems appears to be on hold, as customers still grapple with tight budgets.

Just a few months ago, analysts said they expected corporate customers to start upgrading their networks. After several years of tight spending, the hope was that many companies would be forced to open their wallets to invest in new products. Applications such as Internet telephony and security were expected to drive this demand. But so far, these spending trends haven't kicked in.

"The need to upgrade is still there," said Mark Sue, an analyst at RBC Capital Markets. "But there isn't an urgent need to get it done. Customers remain tight-fisted with their budgets, only spending where they have to."

Recently, contract manufacturers and component suppliers have reported waning sales in the networking market, which could signal bad news for companies like Cisco.

On Tuesday, Jabil Circuit, which manufactures products for Cisco, Hewlett-Packard and 3Com, reported a 4 percent quarterly decline in its networking business. While the company's overall sales were solid, management said it expects business in the networking market to be down another 5 percent in the following quarter.

Cisco, which accounts for 13 percent of Jabil's total revenue and nearly 66 percent of its revenue in the networking segment, is one of the company's largest customers, according to Lehman Bros.

Other suppliers have also painted a less rosy picture of the future. Communication semiconductor suppliers such as Xilinx, Altera and Broadcom have all warned of slowing demand among networking gear makers.

Analysts have reacted to the market uncertainty by warning investors with stock downgrades. On Wednesday, a Deutsche Bank analyst downgraded Cisco's stock to a "hold" from a "buy."

Cisco itself has already begun prepping investors for the traditionally weak October quarter. During its last earnings conference call, the company said it expects sales to be flat to slightly up for the current quarter. And two weeks ago, at an investor conference in New York, CEO John Chambers reiterated his message of continued cautious spending in North America.

Because Cisco dominates both the Ethernet-switching and IP-routing market worldwide, it's often watched as a bellwether stock, providing insight to the rest of the industry.